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Monthly Archives: November 2008

Treasury and the Federal Reserve Announce the Term Asset-Backed Securities Loan Facility

By Dustin Hall - Thursday, November 27, 2008

On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”).  The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”).  To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS.  Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.

Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating.  Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.

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FDIC Expands Bidder List for Troubled Institutions

By Dustin Hall - Wednesday, November 26, 2008

On November 26, 2008, the FDIC issued a press release outlining a new plan to allow parties that do not have a bank charter to bid on failing institutions.  We will keep you up to date as additional details emerge on this new plan.  Below is the complete text of the FDIC’s press release.

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Impact of Latest Tax Rules on Bank M&A Activity

By Frank Crisafi - Tuesday, November 25, 2008

One of the consequences of the TARP Capital program is that some banks will use some of the capital infusion to acquire other banks.  We believe that the “winners” in the TARP race will also attract additional private capital as investors decide who the long-term survivors are.  The Internal Revenue Service recently released two notices intended to provide relief to banks and other financial institutions that are looking to raise capital from the tax rules limiting the use of losses after there has been an ownership change in the stock of a corporation.  We believe that once it is widely understood by banks it will add momentum to the merger activity.

Generally, a corporation that has a taxable loss (i.e., tax deductions in excess of taxable income and gains) for federal income tax purposes during a taxable year generally may carry that loss back to each of the two (2) preceding years (to recoup federal income taxes paid in those years) and then forward to each of the following twenty (20) taxable years.  There are special rules, however, that limit the use of a tax loss (commonly referred to as a net operating loss or “NOL”) carryforward that arose prior to the time when the corporation underwent an ownership change with respect to its stock.

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Round 3 of TARP Capital Infusion

By Rob Klingler - Tuesday, November 25, 2008

On November 25, 2008, the Treasury announced the completion of the third round of TARP Capital infusions.  The Treasury purchased a total of $2.9 billion in preferred stock from 23 financial institutions on Friday, November 21, and has now invested a total of $161.5 billion under the $250 billion TARP Capital program.

Consistent with the guidance previously provided by the Treasury, all 23 financial institutions are listed on a national securities exchange.

The largest investment in the third round was $525 million with Associated Banc-Corp out of Green Bay, Wisconsin, while the smallest was $11.4 million with First Community Corporation out of Lexington, SC.

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New Proxy Statement Guidance

By Rob Klingler - Tuesday, November 25, 2008

On November 24, 2008, the SEC and RiskMetrics Group (previously ISS) each published new guidance for public companies seeking authorization of blank check preferred stock.

SEC Guidance

The SEC Guidance is based on the staff’s review of a number of preliminary proxy statements filed by institutions seeking to participate in the TARP Capital program.  (We have provided a list of a number of such proxy statements.)  The SEC guidance is designed to aid financial institutions in preparing proxy statements and provides actual comments the staff has issued in its filing reviews.  For those that have not yet filed, a close review of these comments may reduce the risk of comments in the preliminary proxy process.

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Another Day, Another $20 Billion

By Rob Klingler - Tuesday, November 25, 2008

On November 25, 2008, the Treasury announced it will allocate $20 billion under the Troubled Asset Relief Program (TARP) to back the Federal Reserve Bank of New York’s new lending facility for consumer asset-backed securities.  The Federal Reserve Bank of New York is creating this Term Asset-Backed Securities Loan Facility (TALF) to assist the credit markets in accommodating the credit needs of consumers and small business by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.  Our summary of the TALF term sheet is available here.

When combined with the previously announced TARP programs, the Treasury has $15 billion left under TARP that it can invest or otherwise use without Congressional approval (in addition to the amounts that remain available under the TARP Capital Purchase Program).

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Public vs. Private, Round 2

By Rob Klingler - Monday, November 24, 2008

As we’ve previously noted here, here and here, we’re not big fans of the Treasury’s definition of what constitutes a publicly traded company under the TARP Capital program.  The Treasury’s definition provides two tests, one of which is a subset of the other, and doesn’t specify whether both tests or either test must be met.

Non-Exchange-Listed Companies = Private

While speaking to an official with the Federal Reserve Bank of Atlanta today, we were told that: (i) both tests have to be met; (ii) the Over-the-Counter Bulletin Board and Pinksheets were NOT considered “national exchanges,” and therefore companies listed on such would be considered private; and (iii) they believe that all applications filed by companies which have asserted public status with an Over-the-Counter Bulletin Board or Pinksheets listing have been sent back to be reconsidered as private companies.

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Nuggets from the Second Tranche Report to Congress

By Rob Klingler - Monday, November 24, 2008

On November 24, 2008, the Treasury published its Second Tranche Report to Congress, for the period through November 14.  The appendices to the report are available here.  These reports are required under Section 105(b) of the Emergency Economic Stabilization Act of 2008, and are published on the Treasury’s website.

The Report confirms that the purchase of $40 billion in preferred shares from AIG was under the Systemically Significant Failing Institutions Program (SSFI) rather than the TARP Capital Purchase Program (TARP Capital).  The total committed under the TARP Capital program was $158.5 billion as of November 14, 2008.  This confirms our previous analysis.

The Report states that all commitments thus far under the TARP Capital program have been with financial institutions whose stock is traded on national securities exchanges.  As we’ve previously discussed, this is not true, as one of the recipients of the November 14 TARP Capital infusions is traded on the Over-the-Counter Bulletin Board.

The Report indicates that Treasury has established a streamlined evaluation procedure that has resulted in the federal banking agencies using a standardized process to review all applications to ensure consistency.  Treasury states that gives considerable weight to the recommendations of the federal banking agencies.

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Happy Thanksgiving Week

By Katherine Koops - Sunday, November 23, 2008

First, a couple new jokes:

Q. What giant beasts are currently stalking the financial markets?
A. TARPosaurus and T-Reas.

Q. What is their favorite meal?
A. Lame duck.

Q. What’s the next car coming off the U.S. assembly line?
A. The new GMC TARP…gets one mile per 25 billion gallons.

And just in time for Thanksgiving—a simple potluck dish that’s easy to make and feeds billions.

TARP Casserole

  1. Mix 1% to 3% of everything you own in a large bowl.
  2. Sift contents through regulatory strainer.
  3. Deduct up to 500,000 cups of executive compensation.
  4. Whip thousands of bankers, lawyers and analysts into a frenzy and blend in.
  5. Garnish with shredded cash.
  6. Bake at 250 billion degrees to desired degree of doneness.

Makes enough to lend to your neighbors.  Goes great with Warrant Surprise.

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How Much TARP Capital Money is Left?

By Rob Klingler - Sunday, November 23, 2008

When the Treasury announced the TARP Capital program on October 14, 2008, the Treasury indicated that it had set aside $250 billion of the $700 billion authorized for the overall Troubled Asset Relief Program.  The $250 billion TARP Capital program was for the purchase of senior preferred stock, with $125 billion designated for the initial participants and $125 billion for the remainder of the banking industry.

As of November 20, 2008, the Wall Street Journal’s list of participants in the TARP Capital program identifies a total of $232.9 billion that has been completed, applied for, or publicly announced as pending.  However, the Wall Street Journal’s list includes the $40 billion in senior preferred stock to be purchased from the American International Group (AIG), as announced by the Treasury on November 10, 2008.

AIG’s $40 billion investment is part of the overall TARP Program, but is not part of the $250 billion set aside for the TARP Capital program.  As a result, the Wall Street Journal’s number should be reduced to $192.9 billion, indicating that there is approximately $57.1 billion remaining under the TARP Capital program (assuming all of the applicants on the WSJ’s list are ultimately approved).

The application by several large insurance companies to become bank holding companies in light of recent thrift acquisitions increases the industry’s total risk weighted assets, and may make TARP Capital more scarce.  However, the Treasury still has an additional $60 billion that it can invest without further Congressional approval.  With the Treasury’s announcement that it is unlikely to purchase assets directly, the Treasury may elect to expand the $250 billion TARP Capital program if there is sufficient demand from eligible institutions.

Update 11/24/08 – The U.S. Government’s additional support of Citigroup is similarly not part of the $250 billion set aside for TARP Capital, although portions of the assessment are out of the overall TARP program.  Specifically, $5 billion of the asset guarantee and the $20 billion preferred stock investment are covered by TARP.  As a result, the Treasury now has $35 billion that it can invest or otherwise use without further Congressional approval.

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